It could have been the world’s biggest aerospace and defense company, but it was not to be. With the merger of the UK’s BAE Systems and pan-European EADS now officially transitioned from on-deathbed to dead, the real question is, what next?

The FT says BAE, with its heavy presence in the U.S. defense market, could become an attractive takeover target for one of the big five American defense players – provided, of course, the potential acquirer could overcome the Pentagon’s natural aversion to further consolidation among its small group of big-time suppliers:

“The emergence of a new suitor for BAE from among the big US defence companies is another possibility many have noted, arguing that the deal’s collapse will leave BAE vulnerable to being picked off. Lockheed Martin and General Dynamics are said already to have approached the Pentagon to see whether such a proposal would be acceptable.

Few who have closely follow the defence industry believe it would be. The US defence department’s long-held view has been that the number of its biggest suppliers has shrunk enough following the US consolidation of the late 1990s that created Lockheed and Boeing, the country’s biggest defence contractors.

Its opposition to further consolidation in the US defence market may have eased somewhat as spending cuts have prompted companies to begin layoffs, but BAE’s size – it is the world’s third largest defence company, after Lockheed and Northrop, and a top 10 supplier to the US government – remains an insurmountable hurdle, say most analysts.”

Now that BAE has shown itself to be on the market for a deal, its shareholders and others in the industry will be expecting something big from its management in the wake of this merger falling apart. More on this after the jump. Read More »